Econ Final Exam (Exam 3 Answers)

If the quantity of a good supplied is not very sensitive to the price of the good, economists say the supply of the good is relatively a. inelastic. b. elastic. c. robust. d. inverse.

a. inelastic.

The basic difference between macroeconomics and microeconomics is that a. macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents). b. macroeconomics is concerned with policy decisions, while microeconomics applies only to theory. c. microeconomics is concerned with the forest (aggregate markets), while macroeconomics is concerned with the trees (subcomponents). d. opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics.

a. macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents).

U.S. imports are a. not added to U.S. GDP because they are produced abroad. b. added to U.S. GDP because they are consumed domestically. c. added to U.S. GDP because they represent an increase in inventories. d. added to U.S. GDP as government purchases because the government decides what goods may be imported

a. not added to U.S. GDP because they are produced abroad.

Refer to Figure 4. The amount of the tax per unit is a. $1. b. $2. c. $3. d. $5.

a. $1.

Refer to Figure 10-4. At which point is the economy at long-run equilibrium? a. A b. B c. C d. D

a. A

If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result? a. An inflow of capital and an appreciation in the foreign exchange value of the dollar b. An outflow of capital and a depreciation in the foreign exchange value of the dollar c. An inflow of capital and a depreciation in the foreign exchange value of the dollar d. An outflow of capital and an appreciation in the foreign exchange value of the dollar

a. An inflow of capital and an appreciation in the foreign exchange value of the dollar

Which of the following is an argument for tax cuts rather than government spending as a way to promote recovery from a recession? a. Tax cuts are better suited to direct resources into projects that consumers value more highly than the resources required for their production. b. 100 percent of a tax cut will stimulate aggregate demand, but this will not be the case for an increase in government expenditures. c. Tax cuts will encourage rent seeking; increases in government spending will not. d. Tax cuts will change the structure of aggregate demand more than increases in government spending.

a. Tax cuts are better suited to direct resources into projects that consumers value more highly than the resources required for their production.

Suppose an economy is operating at its maximum sustainable output rate. Neither recession nor economic boom are present. Which of the following would be true? a. The economy would be considered at full employment. b. Actual GDP would exceed potential GDP. c. Actual unemployment will be less than the natural rate of unemployment. d. One hundred percent of the labor force is employed

a. The economy would be considered at full employment.

Which of the following will most likely accompany an unanticipated increase in aggregate demand? a. an increase in real output b. an increase in unemployment c. a decrease in real GDP d. a decrease in the demand for resources

a. an increase in real output

Marquis decides to bank with First National Bank (FNB). He opens a checking account by making a $1,000 cash deposit. As a result of this transaction, the bank's reserves a. and checking deposits both increase by $1,000. b. increase by $900 and checkable deposits increase by $1,000. c. decline by $1,000 and checkable deposits increase by $1,000. d. are unchanged, but the checkable deposits increase by $1,000.

a. and checking deposits both increase by $1,000.

Suppose the annual rate of inflation has been 3 percent during each of the last three years and that borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly rises, a. borrowers gain at the expense of lenders. b. lenders will gain at the expense of borrowers. c. the real interest rate will exceed the nominal interest rate. d. there is no reason to expect that the inflation will help borrowers relative to lenders

a. borrowers gain at the expense of lenders.

For a typical product, a decrease in consumer income will cause the market demand for the product to a. decrease, which is a shift to the left of the demand curve. b. decrease, which is a shift to the right of the demand curve. c. increase, which is a shift to the left of the demand curve. d. increase, which is a shift to the right of the demand curve.

a. decrease, which is a shift to the left of the demand curve.

The demand for money varies a. directly with both the price level and the level of real GDP. b. inversely with both the price level and the level of real GDP. c. inversely with the price level and directly with the level of real GDP. d. directly with the price level and inversely with the level of real GDP

a. directly with both the price level and the level of real GDP.

The long-run equilibrium price level is the price level the economy is expected to reach when the a. economy produces its potential output. b. Fed has stabilized interest rates. c. federal budget is balanced. d. discount rate equals the prime rate.

a. economy produces its potential output.

Darryl would like to work as an accountant full time. A full-time position is not available, however, so he must accept a part-time job working 15 hours per week. The Bureau of Labor Statistics would categorize Darryl as a. employed. b. unemployed. c. both employed and unemployed. d. not in the labor force

a. employed.

If the quantity of euro demanded were greater than the quantity supplied, then the price of the a. euro would rise. b. euro would fall. c. dollar would rise. d. euro would be in equilibrium

a. euro would rise.

An increase in capital formation that expands long-run aggregate supply will a. increase output and decrease prices. b. increase both output and prices. c. decrease both output and prices. d. decrease output and increase prices.

a. increase output and decrease prices.

An unanticipated shift to a more restrictive monetary policy by the Fed will a. increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand. b. reduce real interest rates, leading to a depreciation of the dollar and an expansion in net exports and aggregate demand. c. increase real interest rates, leading to higher asset prices that will stimulate aggregate demand. d. reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand.

a. increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand.

The vertical long-run aggregate supply curve reflects the fact that in the long run, an increase in the price level will a. not alter the economy's maximum sustainable rate of output. b. increase the economy's maximum sustainable rate of output. c. reduce the quantity of goods and services purchasers will demand. d. improve the overall efficiency of resource use

a. not alter the economy's maximum sustainable rate of output.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because a. real interest rates will fall, stimulating business investment and consumer purchases. b. the dollar will appreciate on the foreign exchange market, leading to a decrease in net exports. c. lower interest rates will tend to decrease asset prices (for example, stock prices), which decreases wealth and, thereby, decreases current consumption. d. the general level of prices will fall, which will increase the disposable income of households.

a. real interest rates will fall, stimulating business investment and consumer purchases.

Internet sites make it easier for sellers and buyers to find one another and, by doing so, a. reduce transactions costs. b. increase transaction costs. c. reduce the number of exchanges that occur. d. lower the value created by the goods and services available.

a. reduce transactions costs.

Refer to Figure 10-8. The economy depicted is in a. short-run equilibrium at less than the full-employment output level. b. short-run equilibrium at an output level beyond full employment. c. long-run equilibrium at point a. d. long-run equilibrium at point b.

a. short-run equilibrium at less than the full-employment output level.

An issue that generates substantial benefits to a small group of individuals while imposing a small cost on many others is called a a. special-interest issue. b. minority application. c. commons policy. d. national service

a. special-interest issue.

The macroeconomy is said to be in long-run equilibrium only if a. the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium b. prices were incorrectly estimated by decision makers. c. the output of the economy exceeds the full-employment level of output. d. the economy is operating along its short-run aggregate supply curve

a. the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium

The Laffer curve indicates that a. when tax rates are high, a rate reduction may lead to an increase in tax revenue. b. when tax rates are low, an increase in tax rates will generally lead to a reduction in tax revenues. c. an increase in tax rates will always lead to an increase in tax revenues. d. the deadweight losses resulting from taxation are small at the tax rate that maximizes the revenues derived by the government.

a. when tax rates are high, a rate reduction may lead to an increase in tax revenue.

Refer to Figure 3-20. If the price is $8, producer surplus is a. $80. b. $160. c. $320. d. $640.

b. $160

Refer to Figure 7-7. Gross domestic product equals a. $550. b. $510. c. $595. d. $610

b. $510.

If the money interest rate is 7 percent and the inflationary premium 4 percent, the real interest rate is a. −3 percent. b. 3 percent. c. 4 percent. d. 7 percent

b. 3 percent.

Which of the following is most likely to result in an increase in crony capitalism? a. A reduction in entry barriers and an increase in the competitiveness of markets b. An increase in government spending and growth of government regulation c. A reduction in the size of government d. An increase in the share of the population voting in elections

b. An increase in government spending and growth of government regulation

A new hormone will increase the amount of milk each cow produces. If this hormone is adopted by many dairies, what will be the effect on the milk market? a. A decrease in supply, lower equilibrium price, and lower equilibrium quantity. b. An increase in supply, lower equilibrium price, and higher equilibrium quantity. c. An increase in supply, higher equilibrium price, and higher equilibrium quantity. d. A decrease in supply, lower equilibrium price, and higher equilibrium quantity.

b. An increase in supply, lower equilibrium price, and higher equilibrium quantity

Which of the following is a normative economic statement? a. If we doubled the size of welfare payments, we would reduce the number of homeless persons. b. Companies should be concerned with more than just their profits. c. An increase in spending on airport security will reduce the number of hijackings. d. If social security were to be privatized, workers would earn a higher rate of return on their retirement contributions.

b. Companies should be concerned with more than just their profits.

In the United States, decisions about the purchase and sale of securities and other assets designed to impact the money supply are determined by the a. Treasury and Commerce departments b. Federal Open Market Committee c. Secretary of the Department of the Treasury d. House and Senate

b. Federal Open Market Committee

If price rises, what happens to the quantity demanded for a product? a. It increases. b. It decreases. c. It does not change. d. Uncertain--economic theory has no answer to this question.

b. It decreases.

Refer to Figure 3. If the initial demand and supply for soybeans were D, and S1, how would a decrease in the cost of producing soybeans affect the market for soybeans? a. Demand would increase to D2, price would increase to P2, and the quantity would increase to S. b. Supply would increase to S2, price would decrease to Po, and the quantity would increase to S. c. Both demand and supply would increase so the price would remain at Pu, but the quantity would increase to T. d. Both demand and supply would decrease so the price would remain at P1, but the quantity would increase to T.

b. Supply would increase to S2, price would decrease to Po, and the quantity would increase to S.

Which of the following indicates the primary mechanism by which the money supply expands? a. The U.S. Treasury prints additional currency. b. The Fed purchases additional bonds, which increases the reserves available to the banking system. c. The public decides to hold more currency rather than checking deposits. d. The U.S. government purchases additional gold.

b. The Fed purchases additional bonds, which increases the reserves available to the banking system.

Refer to Figure 5. Which of the following is true at the $1 price ceiling shown? a. There will be a surplus of 300 gallons. b. There will be a shortage of 300 gallons. c. Quantity supplied equals 500 gallons. d. Quantity demanded equals 800 gallons.

b. There will be a shortage of 300 gallons.

In which of the following situations is the political process likely to result in the inefficient and wasteful use of resources? a. When the benefits are concentrated and the costs are concentrated b. When the benefits are concentrated and the costs widespread c. When the benefits are widespread and the costs are concentrated d. When the benefits are widespread and the costs are widespread

b. When the benefits are concentrated and the costs widespread

Which of the following will reduce the supply of motorcycles? a. an increase in the population age 16 to 35, the primary consumers of motorcycles b. an increase in taxes imposed on motorcycle producers c. a technological improvement reducing the production costs of motorcycles d. a government study that reveals motorcycle riders, on average, live 10 years longer than those who don't ride motorcycles

b. an increase in taxes imposed on motorcycle producers

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called a. price elasticity of demand. b. consumer surplus. c. the substitution effect. d. income elasticity of demand.

b. consumer surplus

If salsa and nacho chips are complements, an increase in the price of nacho chips would a. increase the price of salsa. b. decrease the demand for salsa. c. increase the demand for salsa. d. have no effect on the demand for salsa.

b. decrease the demand for salsa.

Expansionary fiscal policy during a recession is most effective when it a. creates jobs, even if they are on unproductive projects. b. directs the economy to full employment and resources into productive projects. c. substantially changes the composition of aggregate demand. d. provides members of Congress with large political contributions.

b. directs the economy to full employment and resources into productive projects.

Given the strict quantity theory of money, if the quantity of money doubled, prices would a. fall by half. b. double. c. remain constant. d. increase somewhat but less than double

b. double.

People who receive the benefit of a good without contributing to its costs of production are a. contributors in kind. b. free riders. c. frequent flyers. d. cost maximizers

b. free riders.

If Congress votes to increase government purchases and at the same time decrease personal income taxes, they a. have decided to balance the federal budget. b. have voted for the proper policy to counteract a recession. c. have voted for the proper policy to counteract inflation and an economic boom. d. are trying to achieve a federal budget surplus.

b. have voted for the proper policy to counteract a recession.

When continued for several years, rapid growth in the money supply relative to the growth of real output will likely lead to an extended period of a. low unemployment. b. high inflation. c. low nominal interest rates. d. high rates of real economic growth

b. high inflation.

Other things constant, an increase in resource prices will a. increase the demand for goods and services. b. increase the cost of producing goods and services, which will lead to a higher price level. c. reduce costs and improve profit margins, which will lead to an increase in aggregate supply in the goods and services market. d. cause the natural rate of unemployment to rise

b. increase the cost of producing goods and services, which will lead to a higher price level.

When external costs are present in a market, a. less of the good will be produced than the amount consistent with economic efficiency. b. more of the good will be produced than the amount consistent with economic efficiency. c. the amount of the good produced will be equal to the amount consistent with economic efficiency. d. corresponding external benefits are always generated

b. more of the good will be produced than the amount consistent with economic efficiency.

During the three years following the financial crisis of 2008, the monetary base a. more than doubled and the M1 money supply increased even more rapidly. b. more than doubled, but the M1 money supply increased much less rapidly. c. base fell by almost 50 percent, but the M1 money supply continued to grow at a steady rate. d. fell by almost 50 percent, causing a sharp reduction in the M1 money supply.

b. more than doubled, but the M1 money supply increased much less rapidly.

The highest valued alternative option that must be given up in order to choose an action is called its a. utility. b. opportunity cost. c. capital. d. ceteris paribus.

b. opportunity cost.

According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study a. is positive. b. outweighs the extra cost. c. exceeds the benefits of the previous hour of study. d. will raise your exam score.

b. outweighs the extra cost

The maintenance of a framework of security and order through the establishment and enforcement of rules under which people can interact peacefully with one another and be secure in their person and property is known as the a. productive function of government. b. protective function of government. c. transfer function of government d. illegitimate function of government

b. protective function of government.

According to the Keynesian view, an unanticipated reduction in spending will a. increase the demand for goods and services. b. raise business inventories and lead to a decline in output. c. lead to lower interest rates, which will stimulate aggregate demand and keep the economy at full employment. d. lead to a lower price level, which will quickly guide the economy to full-employment equilibrium.

b. raise business inventories and lead to a decline in output.

If an increase in the interest rate paid banks on their deposits with the Fed causes banks to increase their reserves, other things constant, this will a. reduce the money supply during a period of inflation and increase it during a recession. b. reduce the size of the deposit expansion multiplier. c. increase the size of the deposit expansion multiplier. d. reduce the size of the deposit expansion multiplier during a period of inflation and increase it during a recession.

b. reduce the size of the deposit expansion multiplier.

A deadweight loss results from the imposition of a tax on a good because the tax a. induces the government to increase its expenditures. b. reduces the quantity of exchanges between buyers and sellers. c. causes a disequilibrium in the market. d. imposes a loss on buyers that is greater than the loss to sellers.

b. reduces the quantity of exchanges between buyers and sellers.

Mathematically, the marginal propensity to consume is a. consumption divided by income. b. the change in consumption divided by the change in income. c. income divided by consumption. d. the change in income divided by the change in consumption.

b. the change in consumption divided by the change in income.

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect a. the price level to rise and real GDP to fall. b. the price level to fall and real GDP to rise. c. the price level and real GDP both to stay the same. d. the price level and real GDP to fall.

b. the price level to fall and real GDP to rise.

Refer to Figure 1. If an economy operates at point A on the production possibilities curve, a. to produce more food, it would have to increase its production of clothing. b. to produce more clothing, it would have to reduce the production of food. c. it is operating inefficiently. d. to produce more clothing, it would have to increase the production of food.

b. to produce more clothing, it would have to reduce the production of food.

Refer to Table 13-1. If the reserve requirement is 10 percent, then this bank a. could make a new loan of $15,000. b. has less reserves than required. c. has excess reserves of less than $15,000. d. has excess reserves of less than $10,000.

c. has excess reserves of less than $15,000.

In the loanable funds market, the price that borrowers must pay for earlier availability is the a. inflation rate. b. wage rate. c. interest rate. d. exchange rate.

c. interest rate.

Refer to Figure 5-4. The figure illustrates an industry that generates an external cost. Without government intervention, the market equilibrium price and quantity would be a. $1.90 and 38 units, respectively. b. $1.80 and 35 units, respectively. c. $1.60 and 42 units, respectively. d. $1.35 and 58 units, respectively

c. $1.60 and 42 units, respectively.

Refer to Figure 4. The price that sellers receive after the tax is imposed is a. $8 b. $6. c. $5. d. $3.

c. $5.

10- Refer to Table 2-4. If Cruse and Friday want to maximize their consumption possibilities, a. Cruse should specialize in producing good X and Friday in producing good Y, but no trade should be allowed. b. Cruse should specialize in producing good X and Friday in producing good Y; trade should occur to maximize joint consumption. c. Cruse should specialize in producing good Y and Friday in producing good X; trade should occur to maximize joint consumption. d. Not enough information is provided to conclusively answer this question.

c. Cruse should specialize in producing good Y and Friday in producing good X; trade should occur to maximize joint consumption.

Refer to Figure 10-7. Starting from long-run equilibrium at point F, at which of the following points would short-run equilibrium occur following a decrease in resource prices? a. I b. F c. G d. H

c. G

The natural rate of unemployment a. is an artificially low rate that cannot be maintained. b. is a constant rate that is unaffected by changes in public policy. c. is the rate of unemployment present when the economy is operating at full employment. d. is equal to the number of persons unemployed divided by the number in the labor force

c. is the rate of unemployment present when the economy is operating at full employment.

Brianna is an architect and she is trying to decide whether to hire Jacob, a draftsman, to assist with her work. Brianna could hire Jacob at $20 per hour but it would take him three times as long to complete a task as it takes Brianna. Brianna is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true? a. Brianna should not hire Jacob because it would be faster for her to do the work herself. b. Brianna should do the drafting work herself because she has the lower opportunity cost. c. Jacob should be hired at the $20 per hour wage rate. d. Jacob should be hired, but only if he is paid more than $30 per hour.

c. Jacob should be hired at the $20 per hour wage rate.

Of the following, who would most likely be hurt by an unanticipated increase in the rate of inflation? a. An individual with a 30-year fixed-rate home mortgage loan b. The U.S. federal government because it has a large quantity of outstanding debt c. Lenders who have made long-term loans at fixed interest rates d. Social Security recipients whose benefits are adjusted upward as the general level of prices increases

c. Lenders who have made long-term loans at fixed interest rates

Suppose this year's inflation rate is 4 percent, which is greater than the 2 percent everyone expected. Which of the following is true? a. Real GDP will increase. b. The unemployment rate will probably rise. c. Potential output will remain the same. d. The short-run aggregate supply curve will shift to the right.

c. Potential output will remain the same.

This graph illustrates the market for a product that generates an external benefit when consumed. D is the private market demand curve, while D is the demand curve including the external benefit. Refer to Figure 5-3. Which of the following is true? a. Relative to economic efficiency, output of the good will be too large and the price too low. b. Relative to economic efficiency, output of the good will be too large and the price too high. c. Relative to economic efficiency, output of the good will be too small and the price too low. d. Relative to economic efficiency, output of the good will be too small and the price too high

c. Relative to economic efficiency, output of the good will be too small and the price too low.

Air travel from New York to Miami costs $300 and takes 6 hours. A bus ticket between the cities costs $150 and takes 56 hours. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be a. $1 per hour. b. $3 per hour. c. S5 per hour. d. $50 per hour.

c. S5 per hour.

If a Japan-based auto firm produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted? a. Japan's, because it is produced by a Japanese company b. Japan's because that is where the car is purchased c. The GDP of the United States because that is where it was built d. Both Japan and the United States

c. The GDP of the United States because that is where it was built

Why is it difficult for the Fed to institute monetary policy changes in a manner that will maintain full employment and price stability? a. The Fed does not have the tools needed to alter the supply of money. b. Monetary policy is unable to alter short-term interest rates. c. The time lags between changes in monetary policy and when the changes exert an impact on employment and prices are long and variable. d. It takes the Fed a long time to change the direction of monetary policy.

c. The time lags between changes in monetary policy and when the changes exert an impact on employment and prices are long and variable.

Tyler owns a truck that he values at $2,000. Sofia, who does a lot of hauling, values the truck at $6,000. If these two are allowed to negotiate, which of the following will most likely occur? a. Tyler will sell the truck for $1,500. b. Sofia will buy the truck for $7,000. c. The truck will be sold at a price greater than $2,000 but less than $6,000, and both parties will benefit. d. Sofia will benefit more than Tyler if the truck is sold.

c. The truck will be sold at a price greater than $2,000 but less than $6,000, and both parties will benefit.

Suppose the population (age 16 and over) of Indonesia is 200 million; 9 million are unemployed, and 111 million hold jobs. Indicate the rate of unemployment and the employment/population ratio of Indonesia. a. The unemployment rate is 4.5 percent, and the employment/population ratio is 55.5 percent. b. The unemployment rate is 7.5 percent, and the employment/population ratio is 60 percent. c. The unemployment rate is 7.5 percent, and the employment/population ratio is 55.5 percent. d. The unemployment rate is 8.1 percent, and the employment/population ratio is 60 percent

c. The unemployment rate is 7.5 percent, and the employment/population ratio is 55.5 percent.

When a price ceiling is imposed below the equilibrium price of a commodity, a. quantity supplied will be greater than quantity demanded for the good. la, the problem of scarcity will be solved. c. a shortage of the good will develop. d. a surplus of the good will develop.

c. a shortage of the good will develop.

The velocity of money is the a. rate at which the price index for consumer goods rises. b. multiple by which an increase in government expenditures will cause output to expand. c. average number of times a dollar is used to buy goods and services included in GDP. d. number of times a dollar is taken out of the country during a year.

c. average number of times a dollar is used to buy goods and services included in GDP.

A good is considered nonexcludable if a. many individuals can share in the consumption of the same unit of the good. b. the consumption of the good by one individual lowers the amount available for others. c. it is impossible or very costly to exclude nonpaying customers from receiving the good. d. its production is financed through tax revenue rather than market prices.

c. it is impossible or very costly to exclude nonpaying customers from receiving the good.

Which of the following is most likely to lead to an increase in the rental price of apartments near your campus? a. lower property taxes on apartment buildings b. an unexpected increase in enrollment at your college c. lower prices for the bricks used in the construction of apartments d. the building of a new large dormitory on the college campus

c. lower prices for the bricks used in the construction of apartments

An increase in the money supply a. lowers the interest rate, causing a decrease in investment and an increase in GDP. b. lowers the interest rate, causing an increase in investment and a decrease in GDP. c. lowers the interest rate, causing an increase in investment and an increase in GDP. d. raises the interest rate, causing an increase in investment and an increase in GDP

c. lowers the interest rate, causing an increase in investment and an increase in GDP.

If the government cuts the tax rate, workers get to keep a. less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. b. less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left. c. more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. d. more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

c. more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

Gross domestic product (measured in real dollars) is an important social tool because it provides a. observers with a reasonably good index of social progress. b. policy makers with a measure of the nation's total wealth. c. policy makers with information about the economy's current rate of output and the direction of recent changes. d. economists with a reasonably good measure of income inequality

c. policy makers with information about the economy's current rate of output and the direction of recent changes.

The major overall purpose of the Federal Reserve System is to a. keep the discount rate flexible. b. insure the deposits of persons holding funds with banking institutions. c. regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy. d. regulate the levels of excess reserves held by member banking institutions.

c. regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.

Which one of the following events will reduce GDP? a. Mrs. Lee hires a housekeeper. b. You buy the ingredients to bake a loaf of bread, but you burn the bread and throw it away. c. You decide to work five more hours per week at your bookkeeper job, even though you need more time to study. d. An automobile manufacturer lays off 200 workers as the result of a fire in the paint shop.

d. An automobile manufacturer lays off 200 workers as the result of a fire in the paint shop.

Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature harvesting of trees the woodpeckers like to nest in. This is an example of which of the following? a. Association is not causation. b. The fallacy of composition. c. The use of ceteris paribus conditions in economic analysis. d. Good intentions do not always lead to desirable outcomes.

d. Good intentions do not always lead to desirable outcomes

Refer to Figure 12-3. If an economy is currently operating at Y1, which of the following would a new classical economist be most likely to favor? a. Higher taxes and reductions in expenditures in order to shift the budget toward a surplus b. Lower taxes and increase in expenditures in order to shift the budget toward a deficit c. A balanced budget d. No government action and reliance on the self-corrective mechanism

d. No government action and reliance on the self-corrective mechanism

How will an increase in government expenditures during a recession be reflected in GDP? a. An increase in government spending will reduce aggregate demand and decrease GDP. b. An increase in government spending will not affect GDP. c. An increase in government spending will increase GDP, but only if it is directed toward economically productive projects. d. The government spending will increase GDP even if the spending encourages rent seeking and other unproductive activities.

d. The government spending will increase GDP even if the spending encourages rent seeking and other unproductive activities

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result? a. Velocity will decline, enhancing the stimulus effect. b. Velocity will increase, somewhat dampening the stimulus effect. c. Velocity will increase, enhancing the stimulus effect. d. Velocity will decline, somewhat dampening the stimulus effect.

d. Velocity will decline, somewhat dampening the stimulus effect.

Which of the following is not an example of an externality? a. A paper pulp mill releasing pollution into the atmosphere b. Persons driving during a busy rush hour c. A drunk driver operating a car on a public highway d. Your neighbor sitting in her basement listening to music through her headphones

d. Your neighbor sitting in her basement listening to music through her headphones

A subsidy is defined as A. a payment that must be made to the government whenever a good or service is sold. B. the number of trades that are eliminated from a market when a tax is imposed. C. the difference between total revenue and total cost for a business firm. D. a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased.

d. a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased.

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas? a. a decrease in inflation b. a decrease in unemployment c. a decrease in the general level of prices d. an increase in the general level of prices

d. an increase in the general level of prices

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will a. cause real output to expand $200 billion if the marginal propensity to consume is three-fourths. b. exert little impact on real output because higher real interest rates will crowd out private spending. c. stimulate aggregate demand, causing prices to rise (inflation). d. be largely offset by a reduction in private spending because individuals will anticipate higher future taxes.

d. be largely offset by a reduction in private spending because individuals will anticipate higher future taxes.

An analysis of market failure and government failure indicates a. government decision making is always preferable to using markets. b. market decision making is always preferable to public-sector action. c. government action is necessary whenever market failure occurs. d. both the market and the government may fail to meet conditions of economic efficiency; in each individual case, the choice of market or public-sector action requires careful evaluation.

d. both the market and the government may fail to meet conditions of economic efficiency; in each individual case, the choice of market or public-sector action requires careful evaluation.

The primary benefit of a monetary system of exchange compared to a barter system is the increased a. ability to record transactions. b. time necessary to find trading partners. c. time devoted to shopping. d. efficiency in arranging transactions.

d. efficiency in arranging transactions.

When the government levies taxes to subsidize the producers of corn-based sugar, the subsidies will a. expand the output of a good that consumers value highly relative to cost. b. expand total employment if employment in the production of corn increases. c. increase net employment and improve the efficiency of resource use. d. exert little impact on net employment because expansion of employment in corn production will be partially offset by less employment in other sectors as the result of the taxes.

d. exert little impact on net employment because expansion of employment in corn production will be partially offset by less employment in other sectors as the result of the taxes.

If the Fed wanted to shift to a more restrictive monetary policy and reduce the money supply, it could a. decrease the reserve requirements imposed on commercial banks. b. purchase U.S. government securities and other financial assets in the open market. c. decrease the interest rate on loans extended to banks and other financial institutions. d. increase the interest rate paid to banks on their deposits with the Fed, encouraging banks to hold more reserves rather than extend additional loans.

d. increase the interest rate paid to banks on their deposits with the Fed, encouraging banks to hold more reserves rather than extend additional loans.

Public choice theory indicates that the behavior of people in government a. differs from the behavior of people in the private sector because they are motivated by the public interest rather than their own personal self-interest. b. differs from the behavior of people in the private sector because public sector decision roles do not allow people to pursue their own self-interests. c. is the same as people in the private sector only if decisions are made by majority vote. d. is best understood by applying the same principles we use to predict the behavior of people in the private sector.

d. is best understood by applying the same principles we use to predict the behavior of people in the private sector.

Which of the following is not a component of the M1 money supply? a. demand deposits b. large-denomination (more than $50 bills) c. interest-earning checking deposits d. outstanding balances on credit cards

d. outstanding balances on credit cards

Legislation that offers immediate and easily recognized benefits, at the expense of costs that are observable only in the distant future, is often enacted even when economic inefficiency results. This can be expected because of a. a lack of incentive for operational efficiency in the public sector. b. market failure. c. the special-interest effect. d. the shortsightedness effect.

d. the shortsightedness effect.

An income tax is defined as regressive if a. the tax of those with higher incomes exceeds the tax of those with low incomes. b. the tax of those with higher incomes is less than the tax of those with low incomes. c. those with higher incomes pay a higher percentage of their incomes in taxes than those with low incomes. d. those with higher incomes pay a lower percentage of their incomes in taxes than those with low incomes.

d. those with higher incomes pay a lower percentage of their incomes in taxes than those with low incomes.